Isn't That Rich Podcast

Navigating the world of commercial lending can feel like a maze, but with the right guidance, it can be a smooth and rewarding process. Whether you're a new business owner looking for startup funds or an established company seeking to expand, understanding the ins and outs of commercial lending is key. Today, we’re diving into the essentials of commercial lending with insights from Mike Hopkins, a seasoned banker with over 40 years of experience. Mike brings a wealth of knowledge, humor, and practical advice to the table, making the complex world of business finance more accessible.

From Teller to Trusted Banker: Mike Hopkins' Journey

Mike Hopkins didn’t start out knowing he’d spend over four decades in banking. After graduating from West Frankfort High School and earning a business degree in marketing from SIU Carbondale, Mike found himself unexpectedly entering the banking world. What started as a gig repossessing cars quickly evolved into a lifelong career in lending. Over the years, Mike has climbed the ranks from handling small loans to becoming a key player in commercial lending, with 27 years of experience under his belt in this specialized area.

Mike’s journey reflects the importance of adaptability and learning on the job. His early experiences taught him the value of understanding both sides of the lending process—helping people while ensuring the bank’s interests are protected. It’s a balance that has defined his approach to commercial lending.

The First Step: Planning Your Business and Securing Financing

For those just starting a business, the world of finance can be intimidating. Mike’s advice? Start with a solid business plan. He recommends utilizing resources like the Illinois Small Business Development Center at SIU Carbondale, which offers free services to help you craft a business plan, perform financial analysis, and more. Walking into a bank with a well-thought-out plan not only shows you’re serious but also reduces the perceived risk, making it easier for a banker to say "yes."

Mike uses a simple analogy to drive the point home: If two cousins ask to borrow $500, and one presents a detailed plan on how they’ll repay it while the other is vague and uncertain, who would you lend to? The same logic applies to business lending. The less risk you present, the better your chances of securing a loan.

What Does Farmers State Bank Offer?

Farmers State Bank provides a wide range of commercial lending options, catering to different needs. From loans for rental properties and commercial buildings to financing for large equipment and even food trucks, Farmers has it covered. They also specialize in SBA (Small Business Administration) loans, which can offer added security for the bank and potentially better terms for the borrower.

So, what’s the difference between a traditional commercial loan and an SBA loan? Mike explains that an SBA loan comes with a government guarantee, making it a safer bet for the bank, especially in higher-risk scenarios. This guarantee can cover up to 70% of the loan, reducing the bank’s exposure and potentially making it easier for startups or high-risk businesses to get approved.

The Five C's of Credit: What Banks Look For

When applying for a commercial loan, banks typically consider what Mike refers to as the “Five C’s of Credit”: Character, Capacity, Capital, Collateral, and Conditions.

1. Character: This is all about trust. If a banker knows you have a good track record, they’re more likely to lend. If not, they’ll scrutinize your credit history, past behavior, and overall reputation.

2. Capacity: Can you afford to repay the loan? Banks look at your income, existing debts, and whether you have the capacity to take on more debt.

3. Capital: This refers to your net worth and assets. Do you have savings or other assets that could support you if things go south?

4. Collateral: What do you have to offer as security? Typically, this could be property, equipment, or other assets that the bank can claim if you default.

5. Conditions: What’s the current economic climate? Banks consider external factors that might affect your ability to succeed, such as market conditions or industry trends.

Mike emphasizes that a strong character is often the most critical factor, especially during tough times. Good character can keep you afloat when the going gets tough, and it’s something banks value highly.

Timing Your Loan: When to Seek Financing

Knowing when to seek financing is crucial. According to Mike, businesses typically come to the bank when they’ve maxed out their current capabilities and need more capital to grow. This could be for expanding operations, purchasing new equipment, or even acquiring another business. It’s essential to have a clear vision of how the loan will help increase sales and profitability.

Mike also discusses the importance of cash flow management. If your expenses are one-time costs that will benefit the business long-term, it might make sense to finance them. However, maintaining a strong cash flow is key to repaying loans and ensuring the business’s ongoing success.

Understanding Collateral: The Backbone of Your Loan

Collateral serves as security for the loan, and its value can significantly impact the terms. For instance, a commercial building might allow for a loan term of up to 20 years, while equipment loans typically range from 7 to 10 years. The lifespan of the collateral determines the loan term, ensuring that the asset doesn’t outlive the debt.

Mike explains that banks use a Uniform Commercial Code (UCC) filing to secure assets like equipment, ensuring that the bank has a claim if the borrower defaults. However, he’s quick to point out that no bank wants to repossess assets; the goal is always to work with borrowers to find a solution.

Navigating the Market: How Interest Rates Affect Commercial Loans

Interest rates have been a hot topic recently, with significant increases impacting borrowing costs. Mike breaks down how these rates are determined, starting with the Federal Reserve’s discount rate, which influences the prime rate—the rate banks offer their best customers. While the prime rate is a starting point, each borrower’s rate may vary based on their specific situation.

Mike also explains the difference between balloon loans and variable-rate loans. A balloon loan matures after a set period, requiring the borrower to either renew or refinance. In contrast, a variable-rate loan adjusts periodically, offering more stability for long-term relationships between the bank and the borrower.

Preparing for a Commercial Loan: What You Need

If you’re considering a commercial loan, Mike advises gathering the last three years of both business and personal tax returns, along with a personal financial statement. This information helps the bank assess trends, income stability, and the impact of new debt. For new businesses or those shifting gears, a well-developed business plan is also crucial.

Farmers State Bank prides itself on quick turnaround times, often responding within two to three weeks. This efficiency, combined with a deep understanding of the local community, sets Farmers apart from larger banks.

The Community Bank Advantage

In an age of digital banking and AI, Mike stresses the enduring value of community banks. Unlike large institutions, community banks like Farmers State Bank understand the local economy and build personal relationships with their clients. This personal touch ensures that even as technology evolves, there will always be a need for the human element in banking.

For those looking to explore commercial lending options, Mike encourages reaching out to a community bank like Farmers State Bank, where personalized service and local knowledge make all the difference.

Commercial lending might seem complex, but with the right banker by your side, it can be a powerful tool for growing your business. Whether you’re starting from scratch or expanding an existing operation, understanding the lending process is the first step toward success.